UnitedHealth Group Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The company provides health coverage and benefits through UnitedHealthcare and health services through Optum. Financial amounts are in U.S. dollars; figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $46,293 | $41,489 | $137,305 | $113,508 |
| Earnings from operations | $3,580 | $3,018 | $9,743 | $8,553 |
| Net earnings attributable to common shareholders | $1,968 | $1,597 | $5,333 | $4,595 |
| Diluted EPS | $2.03 | $1.65 | $5.51 | $4.75 |
| Medical care ratio | 80.3% | 80.9% | 81.3% | 81.4% |
| Operating margin | 7.7% | 7.3% | 7.1% | 7.5% |
- Q3 revenue increased 12%, operating earnings 19%, common-shareholder net earnings 23%, and diluted EPS 23% year over year. For the nine-month period, revenue rose 21%, operating earnings 14%, net earnings 16%, and diluted EPS 16%.
- Q3 medical care ratio improved 0.6 percentage points; the nine-month ratio improved 0.1 points. Nine-month operating margin declined 0.4 points.
- Q3 UnitedHealthcare revenue was $37.2 billion and Optum revenue was $21.1 billion before consolidating eliminations. Segment operating earnings were $2.1 billion and $1.5 billion, respectively.
- Operating cash flow was $11.2 billion for the nine months, versus $6.2 billion in 2015. Management said the increase reflected higher earnings and receipt of a $3.8 billion October CMS premium payment in September. Investing cash flow was negative $8.7 billion; financing cash flow was negative $0.7 billion.
- Cash and cash equivalents were $12.8 billion at September 30, versus $10.9 billion at December 31, 2015. The company reported $38.5 billion of cash, cash equivalents and available-for-sale investments, but only $545 million of cash and cash equivalents was available for general corporate use.
- Balance-sheet commercial paper and current debt maturities were $7.2 billion; long-term debt was $26.0 billion. The debt table reported $33.0 billion carrying value for commercial paper, term loan and long-term debt, excluding other financing obligations. The company had $4.68 billion of commercial paper outstanding and no draws on its $6.0 billion revolving credit facilities. Its defined debt-to-capital ratio was approximately 45%, against a 55% covenant limit.
Material changes versus the prior period
- Growth reflected increased membership across benefits businesses and growth across Optum. UnitedHealthcare served 2.1 million more domestic people year over year. Optum revenue grew 9% in Q3; UnitedHealthcare revenue grew 13%.
- Nine-month results include the Catamaran acquisition, completed July 23, 2015. This materially affects comparability, particularly OptumRx and product revenue; 2015 includes only part of Catamaran’s results.
- UnitedHealthcare’s nine-month operating earnings were nearly flat year over year, while Optum operating earnings increased 40%. OptumRx benefited from Catamaran and organic growth.
- Nine-month medical costs rose 12%, alongside risk-based membership growth and medical cost trends; management also cited losses on ACA-compliant individual products.
- Interest expense rose to $799 million for nine months from $530 million. Cash dividends paid increased to $1.7 billion from $1.3 billion; the annualized dividend rate was raised to $2.50 per share in June 2016.
Outlook, commentary and risks
- The filing provides no specific consolidated earnings or EPS guidance. Management expected to participate in only a few individual public exchanges in 2017, compared with 34 states in 2016; a premium deficiency reserve was recorded for estimated remaining 2016 individual-exchange losses.
- Final 2017 Medicare Advantage base-rate growth was approximately 0.85%, below management’s estimated 3% industry medical-cost trend, creating funding pressure. Management expected at least 80% of its Medicare Advantage members to be in plans rated four stars or higher for 2017 payment purposes, versus approximately 57% for 2016.
- The company paid its $1.8 billion share of the 2016 health insurance industry tax in September. A one-year moratorium applies to the tax for 2017 coverage periods.
- Management cited competition and government funding pressure, medical and specialty-drug cost trends, Medicaid reimbursement-rate risks, regulatory changes, exchange-market uncertainty, cybersecurity and privacy, and the possibility of lower public-program payments. Credit-rating outlooks from Moody’s, S&P and Fitch were negative.
- Legal and regulatory exposures include a California claims-processing dispute with a prior $174 million administrative fine under challenge; government reviews of Medicare risk-adjustment processes and CMS validation audits; and possible state guaranty-fund assessments if Penn Treaty is liquidated. The company could not reasonably estimate potential losses for these matters.
- Q3 medical-cost reserve development included $110 million favorable development related to prior years and $230 million related to the current year. Nine-month prior-year development was $190 million adverse. Management said none of the individual reserve-development items was material.
- Controls and procedures were concluded to be effective as of September 30, 2016; the company reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of revenue and earnings growth reflects organic performance versus the Catamaran acquisition, and how the product-revenue presentation affects comparisons.
- Whether 2017 Medicare Advantage rates, quality ratings and provider reimbursement actions offset the gap between funding and medical-cost trends.
- The performance and reserve adequacy of individual-exchange business, given expected reduced 2017 participation and recorded 2016 losses.
- The timing and potential financial impact of the DOJ/CMS risk-adjustment reviews, California claims matter and potential Penn Treaty assessments.
- Underlying operating cash generation apart from the $3.8 billion CMS premium prepayment, and the availability of cash held outside general corporate use.